Unformatted text preview: idance, and auditors must
apply their judgment. In applying their judgment, auditors are likely to consider the costs and benefits of
alternative reporting options to themselves, the financial statement users, and the company in deciding
how to classify the item. Auditors are normally better off by having events recorded in the most
conservative manner. In this case, the most conservative manner of recording the stock would be to
classify it as debt. Classifying the stock in this way decreases the probability that financial statement
users will suffer outofpocket losses and be able to sue the auditors. Consequently, the auditors would
probably prefer that the stock be classified as debt. It should be noted that some securities are such a
hybrid of debt and equity that GAAP requires such securities to be reported as neither debt nor equity.
Instead, GAAP requires such securities to be reported on the balance sheet in a special section between
longterm debt and stockholders' equity. P12–2
a. The balance in the Common Stock account represents the number of shares of common stock issued
times the par value per share. Since the balance of $300,000 represents 50,...
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